After three years of momentum building in commercial property lending, analysts are projecting that institutional lenders will place what could be record amounts of capital into commercial real estate in 2014.
Commercial property lending is fundamentally strong, and lenders still maintain disciplined underwriting standards, according to comments by Jones Lang LaSalle (JLL) executives attending the Mortgage Bankers Association’s Commercial Real Estate Finance/Multifamily Housing Convention on Feb.3, 2014. At the same time, they said, fundamentals in the real estate market are improving due to growth in housing markets, construction, industrial production and improved consumer sentiment.
“The convergence of these factors leads us to an optimistic 2014 forecast for the real estate lending markets,” said Tom Fish, an executive managing director with the firm, during the event. Other factors behind the anticipated increase in commercial property lending, according to the JLL executives, include an influx of capital looking for new landing spots and a broad range of investors who have announced plans to make fresh commitments in 2014.
Commercial Real Estate Finance Council President and CEO Stephen Renna noted recently that the outlook across all lending sectors – commercial mortgage-backed securities (CMBS), banks, life insurance companies, private equity, and Fannie Mae and Freddie Mac – continues to improve.
“Last year was a significant step forward from 2012 levels. The outlook for 2014 is equally optimistic, if not more so,” Renna said. “The markets are gaining momentum as evidenced by the increasing number of new players entering the market flush with capital and heightened competition amongst lenders.”
Strength in CMBS
In particular, the CMBS market is expected to play a more pronounced role in the commercial real estate capital markets. According to the January 2014 Trepp LLC CMBS Delinquency Report, last month marked the eighth straight month of improvement in the Trepp delinquency rate for commercial real estate loans in CMBS. Loan resolutions remain high, Trepp noted.
Mike Melody, executive managing director and co-head of JLL’s banking business, is forecasting that CMBS issuance could exceed $100 billion this year, and he expects lenders across the board to boost funding to post-recession highs.
“We’re seeing a broad expansion from all commercial lenders, but we expect CMBS to again be one of the big movers in 2014,” he said..
More commercial property is expected to come into the market in 2014 from sellers taking advantage of the current market cycle, but buyers are still expected to outweigh available sellers, according to the JLL analysts. Meanwhile, investment activity in secondary markets and assets will continue to grow as investors have become more comfortable with the risk.
REITs to Pull Back?
However, Brad Case, NAREIT senior vice president for research and industry information, cautioned that investors generally don’t want to start buying properties after commercial mortgage lending has surged.
“As in any other asset, you make money in commercial real estate by having access to capital when others don’t, and by buying properties when others can’t,” Case said.
He pointed out that listed REITs don’t depend on private debt financing and have had access to public as well as private sources of equity and debt financing since the bottom of the liquidity crisis.
“That’s part of the reason that listed REIT returns have been so much better over the past 35 years than private real estate returns: REIT managers scoop up the bargains before private managers can arrange loans,” Case commented.